A Look at Europe

In the absence of any urgent developments on the financial markets this week, we decided it is time to take a look at something that’s gone more or less under the radar lately: the European economy. Despite doing unbelievably well last year, so far 2018 has been nothing if not underwhelming for the eurozone, especially considering the hands-off approach of the European Central Bank and the ongoing issues of Brexit, plus the looming danger of possible trade tariffs from the United States.

There have already been several indications that growth in Europe is slowing down. October’s growth alone has been less compared to the same month in 2016 and 2017. The European Central Bank also revised its own forecasts and expects economic growth of 2% in 2018 (versus 2.5% in 2017). A likely culprit for the slower growth are the trade tariffs started by US President Donald Trump which have upset the global trade balance, forcing many countries to look for different partners than usual in order to avoid the extra fees. Despite this slower growth, however, ECB President Mario Draghi reassured investors that the central bank will stick to its plan to end stimulus in December.

In terms of the global trade conflict, we have to admit that the European Union has not really been the primary target of the United States. Thanks to a meeting with Jean-Claude Juncker, Donald Trump agreed not to add extra fees to European automobile exports to the United States, which was perhaps the biggest threat for the EU. Nevertheless, the bloc has been hit with fees on steel and aluminum exports (the very first tariffs that Trump announced, which were implemented against the largest list of countries). Plus, the trade issue between the US and China is also affecting the eurozone, albeit indirectly. China and the States are the two biggest economies in the world and naturally the EU does tons of business with both of them. Hard-hit by American tariffs, China is itself experiencing some slowdown in economic growth, and this naturally hurts its trading partners, including the European Union.

In fact, earlier this week Germany had to agree that the European Union will start importing natural gas from the United States instead of Russia (even though Russia has been more convenient in no small part due to the fact that there isn’t an ocean separating it from the EU). This was done as a compromise in order to avoid more tariffs places on European goods. Even so, manufacturing in Germany, the strongest economy in the bloc, is slowing. Germany’s massive car industry has not been immune to damage either. Both BMW and Mercedes Benz, the leading German car manufacturers, have reported lower profits recently. All of this can be traced back to the general investment insecurity on the global financial markets which is propelled by the hostilities between the United States and China.

Brexit, too, continues to be a source of instability in Europe. Even though we are very close to the 2-year negotiation deadline between the United Kingdom and the European Union, there have not really been any solid agreements between the two. This is why no one quite knows what would happen after the Kingdom leaves in March, with or without a deal. European companies with offices and factories in the UK are considering temporary halts to their activity there for the first few weeks after the Brexit, while British companies are striving to accumulate as much EU imports as possible before the break up in March. Airlines are also unsure of how to operate flights in and out of the United Kingdom, considering right now they are all bound by European legislation, which might not apply after Brexit.
To add to all of that, Italy is also causing problems for the EU lately. The Italian government (which isn’t particularly fond of the bloc in general) has proposed a budget which will see spending and deficit increase beyond the legally binding boundaries set by the European Union. Unless Italy complies with EU regulations, the bloc will have no choice but fine Italy, which doesn’t have the healthiest economic track record to begin with.

Due to the combination of all of these factors, we are not likely to see any upward momentum in the eurozone in the near future. Perhaps if the troubles with Italy and the United Kingdom are resolved in the next couple of months, 2019 will offer more promise for investors, though the trade war issue will remain.